(vi) Lower of Cost or Net realisable value is an example of:
(a) Consistency Concept.
(6) Materiality Concept.
(c) Matching Concept.
(d) Prudence Concept.
Answers
a)Consistency Concept
Once the company decides on a certain accounting policy it should not be frequently changed. Unless there is a statutory requirement or it allows better representation of the accounts accounting policies should be consistent for long periods of time. This allows users to make inter-firm and inter-period comparisons. Also, frequent changes in policies may be to manipulate the accounts and this must be prevented.
b)Materiality Concept
Materiality states that all material facts must be a part of the accounting process. But immaterial facts, i.e. insignificant information should be left out. The materiality of a transaction will depend on its nature, value and its significance to the external user. If the information can affect a person's investing decision then it is definitely a material fact.
c)Matching Concept
This concept states that the revenue and the expenses of a transaction should be included in the same accounting period. So to determine the income of a period all the revenues and expenses (whether paid or not) must be included.
The matching accounting concept follows the realization concept. First, the revenue is recognized and then we match the costs associated with the revenue. So costs are matched with revenue, the reverse would be an incorrect system.
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D)purdence concept
This is the case of the conservatism convention, which is based on "playing safe". The prudence concepts defines that, we should not overestimate the revenues and underestimates the expenses. It is an accounting principle which assumes that, the expenses and losses are to be recorded as soon as they occurs, but the revenues and assets are only to be recorded when they are actually recognized
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